By now, investors across the world have heard about the recent FDA advisory panel overwhelmingly recommending approval of Afrezza in astounding fashion for both type 1 and type 2 diabetes for MannKind (NASDAQ:MNKD). Investors know that the diabetes market is a huge market. In the U.S. alone, roughly one in 12 people are managing diabetes. China has approximately 100 million diabetic patients as of 2012 statistics. Total global insulin sales have grown an average of $4 billion a year between 2011 and 2012 ($16.8B in 2011 and $20.8B in 2012). However, in 2013, sharp price increases sent the total market up to $35 billion. In 2018, total insulin sales are expected to increase 66% to reach more than $58 billion due to continued price increases.
As investors view pricing data, it is important to keep in mind that these figures represent totals of the global market. This brings the upcoming FDA decision on Afrezza even more important for MannKind investors, because an approval would open the door faster to global markets. And while it could take some time for Afrezza to enter global markets, depending on whether the company decides to go it alone, or sign a blockbuster partnership that could advance the process much quicker, the prospects of Afrezza should not be ignored.
Another interesting point, which I had written about a few months ago, is the Technosphere platform itself. Attempting to place a valuation on the platform is nearly impossible, because it is not known just how far reaching into the pharmaceutical arena the Technosphere platform can expand at this point. All signs point to an endless number of areas it can reach, such as fast acting allergy, pain, and other huge markets. If the company is able to develop expansion into these markets, the valuation of MNKD could become enormous.
Due to the overwhelming fashion, in which the advisory panel recommended approval for Afrezza just last week, it would seem there is a very high chance the FDA will follow suit with a unanimous approval and fast track this much-needed insulin platform to the markets. With the PDUFA delayed now until July 2014, I believe an opportunity for long-term investors has arrived.
There is always a possibility that the FDA could make their decision earlier as well, and there is also the possibility of rejection by the FDA. In my opinion, the overwhelming vote from the Adcom panel and the testimony given at the Adcom hearing are the compelling factors that will put Afrezza into the approval column this time around for MNKD. The presenters for MannKind were completely confident and prepared, and they were able to remove all the myths that were previously being brought to Afrezza, since the trial results announcement last year. If there were any other issues that would be a cause for pause, they would surely have been identified by a much more mixed vote from the panel, and the FDA could have flat out rejected Afrezza on the original PDUFA date of April 15.
While there have been concerns spread about labeling, it is important to note that every drug on the market comes with warning labels, and should not be a sole factor that would prevent approval. Remember, this panel was made up of experts in the field that were requested by the FDA to assist them in making the correct decision on Afrezza. This is a very important aspect of this entire situation. It should be noted that approval is not guaranteed, and should not be thought of being in the bag. But the overwhelming panel votes adds a tremendous positive to the situation.
Nevertheless, if Afrezza is approved by the FDA, I believe MNKD shares will rise significantly from their current value around $7.00 a share heading into the new PDUFA date and again if approval is granted. There should be tremendous value placed on the Technosphere platform, which would be a fully legitimate contender in the medical community once approved. Simple calculations can provide some great detail to the possible current and future valuations of MNKD. For these examples, I will use these sales to determine a possible fair valuation for MNKD shares:
- $35 billion market (using 2013 total insulin sales figures)
- A very conservative 4x multiple (future growth potential)
- A very conservative 25% market penetration of total market
- 361 million shares outstanding
- $35 billion x 25% = $8.75 billion annual sales potential as of 2013
- $8.75 billion x 4 (multiple) = $35 billion
- $35 billion/361 million shares = $96.96 per share (future, but keep in mind 2018 sales are projected to be $58B, which would increase the total per share value)
However, if only current known sales figures are used with no multiple applied, and using the same 25% market penetration potential, we simply remove the multiple and get a current potential valuation for MNKD shares of $24.24 per share. The 25% market penetration I have used is based on the fact that there are only two real players in the insulin market, and is a very attainable market penetration for a revolutionary product that provides an additional treatment option with the use of standard injections with needles.
Therefore, even using a very conservative market penetration, it appears that MNKD shares are sorely undervalued at current levels, and would be severely undervalued should the shares trade at these levels upon announcement of an FDA approval. And further global markets of any Technosphere applications are not even included in this valuation.
For the reasoning noted above, I believe MNKD shares will rise significantly in value from current trading levels heading into the new PDUFA date, and then rise further should the FDA approve Afrezza. A partnership with Big Pharma would also add significant value to the shares. Of course, the downside risk here is FDA denial, which would likely obliterate the share price. However, I fully believe that if the FDA were going to deny approval of this drug, they would have done so already and not extended the PDUFA date.
Disclosure: I am long MNKD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.